Every startup seeks a business with the highest return and lowest liability. Such an entity is an LLP, or Limited Liability Partnership, where some or all of the partners’ liabilities are capped at the capital investment they made in the company. A partner’s personal property and income are shielded from creditors’ legal action. LLPs are essentially a flexible legal and tax structure that enables partners to collaborate and leverage individual expertise to realise economies of scale while also limiting their liability for the conduct of other partners.
The Limited Liability Partnership Act, 2008, which governs such partnerships in India, mandates that at least one partner in an LLP must be an Indian. Under this Act, there is no requirement for a minimum amount of capital. Only if the LLP’s donations reach INR 25 lakhs or their yearly turnover surpasses INR 40 lakhs are LLPs required to audit their books.
How to Register Your Startup as LLP?
The LLPs must be registered with and under the Registrar of the Company’s supervision.
- The various partners’ digital signatures must be gathered to incorporate an LLP.
- The Director Identification Number (DIN) or Designated Partner Identification Number should be requested through an application (DPIN).
- An authorised Certifying Authority must issue a Digital Signature Certificate (DSC), which must then be registered on the Ministry of Corporate Affairs website.
- After that, a new user should register, and they should submit Form 1 to request the name of LLP. By attaching their digital signatures and paying the requisite amount, any of the partners or designated partners may submit the form.
- Following the approval of the name, Form 2 pertaining to the incorporation of LLP must be completed. It is necessary to pay the registration fees outlined in Annexure A of the LLP Rules, 2009.
- After reviewing all pertinent documents and confirming that all applicable LLP Act requirements have been met, the Registrar will register the LLP within 14 days. According to Form 16, a certificate of incorporation will be issued.
- After that, the applicant must visit the National Securities Depository Limited to request a Permanent Account Number (NSDL).
- Within 30 days of the LLP’s incorporation, an agreement must be submitted with Form 3 and Form 4 data.
Advantages of Structuring Your Startup as LLP
- Internal corporate management and organisation is simpler and more adaptable.
- The number of partners an LLP may have has no upper limit.
- The LLP contracts can be modified to meet the needs of the partners.
- Depending on the requirements of the partners, the cash may also be raised and used.
- There is no minimum capital requirement.
- In comparison to other entities like private limited companies, OPCs, etc., the formation fee is lower.
- The LLP partners do not have to pay any additional taxes, such as dividend distribution tax if they wish to withdraw the gains. The “deemed dividend” provision of income tax law does not apply in the case of LLP, and no dividend distribution tax is due in accordance with section 40. (b). LLPs are exempt from the mandatory audit requirement unless their annual turnover or contribution reaches INR 40 lakhs or INR 25 lakhs, respectively. LLPs have a lighter compliance burden because they just need to submit the Statement of Annual Return, Statement of Accounts, and Solvency.
Disadvantages of Structuring Your Startup as LLP
However, registering as an LLP has certain drawbacks as well. A decision should be made after learning about them.
- Funds cannot be raised in an LLP through public solicitation. Angel investors, HNIs, venture capitalists, and private equity funds do not invest in LLPs as shareholders because an LLP does not have the same notion of equity or shareholding as a business.
- An LLP must rely on promoter money and debt funding.
- Regardless of their business, LLPs must annually file an MCA annual return and an income tax return.
- Failure to submit Form 8 or Form 11 (LLP Annual Filing) will result in a penalty of Rs. 100 per day, per form, with no maximum.
- Even if they have various turnovers, all LLPs are subject to the same 30% tax rate.